The Spread of Coronavirus Threatens Supply Shocks at Home and Abroad

A woman wearing a face mask passes by the New York Stock Exchange in New York City, February 3, 2020.

It is estimated that the coronavirus will infect between 40 percent and 70 percent of the world’s population this year. Due to the need to limit public transportation and gatherings to reduce transmission of the virus, labor supply and output will be reduced, and there will be related declines in demand.

This is already happening in parts of the world where the virus has spread most rapidly. Attempts to contain the large outbreaks in Wuhan, the capital of Hubei province in China, have severely curtailed manufacturing there. Approximately 59 million people have been under quarantine in Hubei, and the production of automobiles, aircraft, machine tools, and other goods has been reduced. In South Korea, Samsung Electronics and LG Electronics factories have seen stoppages due to the outbreak in Daegu. If the epidemic takes hold in the United States, this country may witness similar effects on sectors and regions.

Such domestic supply disruptions have the potential to cascade throughout the economy because economic activity is highly interconnected. For example, the viral outbreak in northern Italy shut down the electronic manufacturer MTA, which supplies electronic parts to automakers across the European Union. That means auto plants in several countries may need to close. Similar events may well occur within the United States.

Moreover, because production in certain sectors of the U.S. economy requires inputs that are produced in other parts of the world, supply disruptions elsewhere are likely to affect economic activity here. It is easy to think of sectors where this might happen. The U.S. auto industry, for example, relies heavily on components and assembly from Mexico and Canada. So, if parts production or assembly plants are shut down in those countries, U.S. production could be reduced. Likewise, America’s electronic products industry relies on places such as Taiwan and Malaysia for semiconductors used in computers and cellphones. And the U.S. machinery sector—which produces appliances and appliance parts, along with semiconductor fabricating equipment—also relies heavily on production elsewhere in the world.

America’s interconnection with other economies is reflected in data on the sources of intermediate inputs. Intermediate goods—parts or components that are included in products which are sold to end users—are often imported. In the transportation sector, which includes autos, 23 percent of all intermediate inputs were imported in 2016. In the electronic products and computers sector, the share was 25 percent that same year. Meanwhile, in the machinery sector, which produces capital equipment used in industries such as construction and agriculture, the share of imported intermediate inputs in 2016 was 20 percent.

Clearly, if the epidemic reduces the capacity of foreign suppliers to produce these key intermediate inputs, the immediate ability of the U.S. domestic industry to operate will be reduced. Moreover, because domestic manufacturing tends to be clustered in particular regions, supply shocks that hit a particular industry may have concentrated regional effects. For example, supply disruptions in Mexico and Canada could have strong effects on auto industry employment in places such as Detroit or Minneapolis.

Depending on the scale, location, and duration of the outbreak around the world, the U.S. economy is therefore likely to face negative supply shocks beyond those generated by the reduction in the domestic labor supply. America’s businesses will need to adapt—but their ability to do so will depend on the availability of alternatives at home and abroad.

However, dealing with international and domestic supply problems is not up to business alone. There are some instances where the federal  government needs to act now to mitigate the effects of the outbreak on the supply of imported intermediates and finished goods. Because many of the active ingredients in generic pharmaceuticals are made throughout the world—in places such as India and China—the U.S. government needs to coordinate with domestic drug manufacturers to make sure the supply of many lifesaving drugs is not disrupted. In addition, there are certain crucial medical supplies—such as N95 face masks used to protect medical workers dealing with the outbreak—that are often produced in other countries. Therefore, the federal government should be ready to step in with financial support to quickly increase domestic production or create incentives for foreign producers to increase supply to the United States.

It also should go without saying that the federal government needs to provide whatever resources necessary to make sure that the supply of crucial medical services that hospitals, medical professionals, and public health agencies provide is not disrupted by the epidemic or the economic shocks it delivers.

Beyond ensuring that essential sectors and firms are supported and operating at required levels, the federal government should take steps to limit the harmful effects that the economic fallout from the epidemic has on U.S. households. The Organization for Economic Cooperation and Development has estimated that if the outbreak is severe, it could reduce global growth by 1.5 percentage points this year. Should the United States experience a big shock, there could be employment and business revenue declines in all or parts of the economy, and many households would be adversely affected.

If that is indeed the case, some households may need economic support to endure the crisis. Quarantined people still have to eat and pay their bills. Federal support for paid sick leave, along with other measures to directly increase household incomes where the crisis has caused job loss, would provide needed help.

Small businesses in hard-hit sectors or regions may need access to credit to keep functioning, as they did during the global financial crisis. A program akin to the State Small Business Credit Initiative, which operated between 2011 and 2015, would help viable businesses keep their doors open and their workers employed.

The epidemic has the potential to significantly disrupt the U.S. economy in ways that are difficult to anticipate. That is why it is critical that lawmakers and policy leaders take steps now to meet supply problems we can foresee—and prepare to mitigate the harms that we cannot avoid.

Marc Jarsulic is senior fellow and chief economist at the Center for American Progress.

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